Busse v. Comm'r of Internal Revenue , Docket No. 6858-70.

• Decision Date: 30 May 1972
• Docket Number: Docket No. 6858-70.
• Citation: 58 T.C. 389
• Parties: CURTIS T. BUSSE AND MYRTLE BUSSE, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

58 T.C. 389

CURTIS T. BUSSE AND MYRTLE BUSSE, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 6858-70.

United States Tax Court

Filed May 30, 1972.

John S. Best and Robert A. Schnur, for the petitioners.

Robert M. Burns, for the respondent.

Petitioner sold a patent and his receipts were not entitled to capital gain treatment under sec. 1235, I.R.C. 1954, but were taxable as capital gains under other provisions of the Code. Held, since the transfer was described in sec. 1235(a), I.R.C. 1954, the payments fall within the exception prescribed by sec. 483(f)(4), I.R.C. 1954, to the unstated-interest provisions of sec. 483, I.R.C. 1954. Floyd G. Paxton, 53 T.C. 202(1969), followed.

OPINION

FEATHERSTON, Judge:

Respondent determined a deficiency in petitioners' Federal income tax for 1967 in the amount of $1,659.47. The only issue for decision is whether a portion of the payments received by petitioners during 1967 as consideration for the sale of a patent was unstated interest within the meaning of section 483. ¹

All the facts have been stipulated and are found accordingly.

At the time their petition was filed, petitioners were legal residents of Randolph, Wis. They filed their joint income tax return for 1967 on a cash basis with the district director of internal revenue, Milwaukee, Wis. For convenience, Curtis T. Busse will be referred to herein as petitioner.

Sometime prior to March 20, 1958, petitioner invented new and useful improvements involving a method and machine for stacking cans on pallets. On March 20, 1958, petitioner sold an undivided 50-percent interest in the invention to his brother, Gilbert Busse.

On March 21, 1958, petitioner applied for a patent in respect to such improvements and on August 16, 1960, there was issued to him U.S. Letters Patent No. 2,949,179, entitled ‘Machine for Stacking Cans on Pallets' (hereinafter referred to as the patent). From that date to January 1, 1966, petitioner was the outright owner of a 50-percent interest in the patent. Under the assignment of March 20, 1958, the initial owner of the other 50 percent was Gilbert Busse. He died on July 10, 1962, and his interest in the patent passed to his widow, Marcella J. Busse.

On January 2, 1966, Busse Bros., Inc. (hereinafter the corporation) was organized under the laws of the State of Wisconsin. From the time of the incorporation through the date of the trial of this case on November 1, 1971, petitioner owned exactly 50 percent of the issued and outstanding stock of the corporation. The other 50 percent of the stock was owned by Marcella J. Busse.

On January 2, 1966, petitioner, Marcella J. Busse, and the corporation entered into an oral agreement whereby petitioner and Marcella J. Busse sold to the corporation their entire right, title, and interest in and to the patent. This oral agreement was reduced to writing in an assignment (hereinafter the assignment) executed on April 28, 1967. As consideration for the sale, petitioner and Marcella J. Busse received the corporation's promise, pursuant to the assignment, to pay to them for the life of the patent—

periodic installments in the amount of 5% of Assignee's net selling price (as hereinafter defined) of palletizers and depalletizers (including parts and kits therefor) sold by assignee which are covered by any claim of said Patent No. 2,949,179.

During the calendar years 1966 and 1967, the corporation paid petitioner $31,433.40 and $36,029.01, respectively, on his 50-percent share of the periodic installments. Petitioner, on his Federal income tax returns for 1966 and 1967, reported those amounts as long-term capital gain.

In the notice of deficiency, respondent determined that, of the $36,029.01 received by petitioner in 1967, $3,017.20 was ordinary income in that it represented unstated interest within the meaning of section 483. The imputed interest, determined under the formula prescribed in section 483, was computed for 1967 as follows:

+--------------------------------------------------------+
                ¦BASE DATE JANUARY 2, 1966                               ¦
                +--------------------------------------------------------¦
                ¦Payment date¦Amount   ¦Months¦Factor ¦Principal¦Imputed ¦
                +------------+---------+------+-------+---------+--------¦
                ¦            ¦         ¦      ¦       ¦         ¦interest¦
                +------------+---------+------+-------+---------+--------¦
                ¦            ¦         ¦      ¦       ¦         ¦        ¦
                +------------+---------+------+-------+---------+--------¦
                ¦6/30/67     ¦$6,394.18¦18    ¦0.92860¦$5,937.64¦$456.54 ¦
                +------------+---------+------+-------+---------+--------¦
                ¦9/30/67     ¦10,000.00¦21    ¦.92860 ¦9,286.00 ¦714.00  ¦
                +------------+---------+------+-------+---------+--------¦
                ¦12/31/67    ¦19,634.83¦24    ¦.90595 ¦17,788.17¦1,846.66¦
                +------------+---------+------+-------+---------+--------¦
                ¦            ¦36,029.01¦      ¦       ¦33,011.81¦3,017.20¦
                +--------------------------------------------------------+
                

The question is whether the present transaction falls within the unstated-interest provisions of section 483.² Subsection (f)(4) of that section excepts from the unstated-interest provisions any payments made pursuant to transfers described in section 1235(a),³ relating to the sale or exchange of patents. On facts almost identical to the present ones, this Court, in Floyd G. Paxton, 53 T.C. 202(1969), held that no portion of the payments received in exchange for the patent in that case was unstated interest within the provisions of section 483. We concluded that the exception prescribed by subsection (f)(4) of that section applied even though the taxpayer's right to capital gain treatment of his receipts did not stem from section 1235 but was prescribed by other provisions of the Internal Revenue Code of 1954, as amended. No appeal was taken from that decision.

In ordinary circumstances, where an issue has been decided so recently, we would merely state in a subsequent case our adherence to the prior opinion. However, respondent urgently insists that our interpretation of sections 483(f) (4) and 1235(a) in Paxton was ‘unrealistically narrow, is erroneous and should not be followed.’ He asks us to ‘look beyond the literal wording’ of that section in order to effectuate its underlying purpose, and to hold that the exception laid down by section 483(f)(4) to the imputed-interest provision applies only if the sale of a patent qualifies for capital gain treatment under section 1235.

Respondent argues that section 1235 was enacted to encourage inventive activities by granting inventors capital gain treatment on the sale of their patents. He contends that the section 483(f)(4) exception to imputed interest was inserted to assure that the incentive provided by section 1245 would not be reduced by treating any of the capital gain as imputed ordinary interest income. Since petitioner's right to capital gain treatment of his receipts from his patent is not derived from section 1235 but from other Code provisions,⁴ respondent maintains that it would be illogical to conclude that Congress intended the section 483(f)(4) exception to apply in a situation like this one. His argument is keyed to the proposition that ‘the instant deferred sale to a related corporation was not a ‘transfer,‘ as that term is defined in section 1235(d),‘ and that the transaction should be viewed as an ordinary sale of a capital asset rather than a ‘transfer’ of a patent within the meaning of section 1235(a).

This Court has recently stated that, in construing the Code, it will seek to effectuate the congressional intent rather than follow ‘a slavish unreasoning adherence to the literal reading of the statute.’ International Trading Co., 57 T.C. 455, 461(1971), on appeal (C.A. 7, May 11, 1972). However, there is ‘no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes.’ United States v. Amer. Trucking Ass'ns., 310 U.S. 534, 543(1940); Silvio Gutierrez, 53 T.C. 394, 400(1969), affd. F.2d (C.A.D.C. 1971). Unless the language of the statute is plainly at variance with the legislative policy, we cannot look beyond the normal meaning of the words chosen by Congress. We cannot depart from the statutory language to effectuate what we may merely surmise was the congressional purpose. Cf. General Electric Co. v. Burton, 372 F.2d 108, 111 (C.A. 6, 1967). Respondent's argument must be examined in the light of these principles.

Prior to the enactment of section 483, an individual could sell a capital asset on an installment basis without making any specific provisions for interest payments on the installments. In such cases, the full difference between the cost or other basis for the property and the sales price usually was treated as capital gain to the seller. Thus, the parties could, by the wording of the sales agreements, partially determine the character of the income received from a sale. The committee of Congress were of the view that ‘manipulation of the tax laws in such a manner * * * (was) undesirable’ and recommended ‘corrective action’ in the form of what ultimately became section 483. H. Rept. No. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 196; S. Rept. No. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 606.

Section 483 provides, in general terms, that if property is sold for payments, part or all of which are due more than 1 year after the date of the sale, and if no interest payments are required or if the specified interest is to be computed at an unreasonably low rate, then part of each payment shall be treated as interest. But this provision does not apply to all contracts of sale. It contains several specific exceptions. The one with which we are here concerned is that in section 483(f)(4) which provides that section 483 ‘shall not apply to any payments made pursuant to a transfer described in section 1235(a) (relating to sale or...